- Before you engage in any investing, whether or not you have a little or a lot of money to lose, you should learn everything you can about investing. There is a wealth of investment information freely available online and at libraries. You should never invest in anything if you do not understand it, and you should never expect a salesman to steer you in the right direction. Do your own research.
- It is paramount that you start investing as much as you can as soon as you can. Forget the maximum allowable contribution, which may be overwhelming, if it represents a significant portion of your annual income. Start with what you can invest, even if it is little more than a few dollars a paycheck.
Your initial goal should be to eventually increase your contribution amount to the point in which you receive the full-employer match. The match is free money that your employer gives you for saving your own. If your employer requires you to save 3% of your salary in your retirement account before they match with 5%, then aim to gradually ratchet up your contributions to 3%. Three percent of a $30,000 annual salary is $900 a year or $17 a week, which can be manageable if you can figure out creative ways to live below your means.
Once you are contributing enough to get the employer match, gradually ratchet up your contributions even more, according to your means. A good way to save money is to bank your raises. If you have a scheduled raise coming up, contact your human resources department and tell them that you want the new money contributed directly to your 401(k). If you don't ever see the money, you won't miss it. - Many mutual funds that employers offer their employees as part of their retirement plans charge high annual fees. But only about half of all actively managed funds beat the market indices on any given year, so a year during which your fund performs badly could be compounded by the amount you are charged by your mutual fund.
Instead of losing a chunk of your savings each year in expenses, consider index funds that track particular securities industries or benchmarks. They are extremely low cost and can provide diversification easily. While these funds provide diversification within asset classes, make sure to diversify among asset classes by selecting stock, bond, real estate, commodities and other index funds according to your risk tolerance.
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